Foreclosure Mess To Threaten Banks?

Updated on: November 16, 2010 / 11:30 AM
/ AP

The disarray stemming from flawed foreclosure documents could threaten major banks with billions of dollars in losses, deepen the disruption in the housing market and hurt the government's effort to keep people in their homes, according to a new report from a congressional watchdog.

Revelations that several big mortgage issuers sped through thousands of home foreclosures without properly checking paperwork already has raised alarm in Washington. If the irregularities are widespread, the consequences could be severe, the Congressional Oversight Panel said in a report issued Tuesday. The full impact still is unclear, the report cautions.

Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for home seizures. Financial firms that service a total $6.4 trillion in mortgages are involved, according to the new report. Big banks including Bank of America Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC Mortgage have suspended foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."

It lays out the possible scenarios: Borrowers may not be able to ascertain if they're sending their mortgage payments to the right party. Judges may block all foreclosures. Prospective buyers and sellers could be in left in limbo.

For major banks, if they discovered that they still owned millions of bad mortgage loans they assumed had been sold, the losses could reach billions.

"Serious threats remain that have the potential to damage financial stability," U.S. Sen. Ted Kaufman, the watchdog panel's chairman, said in a conference call with reporters on Monday. "This is an incredibly complex problem. It could turn out to be nothing. It could turn out to be a big deal."

The Treasury Department's foreclosure prevention program could be crimped if mortgage companies taking part in it find their legal right to begin foreclosure proceedings is challenged, affecting their ability to modify home loans. Treasury should actively monitor the effect of the so-called "robo-signing" controversy on the program, the report urges.

Despite the problems, the Obama administration has maintained there is no need to halt foreclosures in all 50 states.

Treasury officials say a review has been undertaken of the procedures for certifying documents for foreclosures of the 10 biggest mortgage companies participating in the program.

"We strongly believe that the reported behavior within the mortgage servicer industry is simply unacceptable, and (companies that) have failed to follow the law must be held accountable," Treasury spokesman Mark Paustenbach said in a statement. Treasury, various regulators, the Justice Department and the Department of Housing and Urban Development are investigating, "and we will continue to monitor the situation closely," Paustenbach said.

Phyllis Caldwell, who heads the department's homeownership preservation office, last month told a hearing by the oversight panel that so far no evidence has emerged of risk to the financial system from the documents scandal or from efforts by mortgage investors to force banks to buy back problem loans because of alleged misrepresentations of their risk.

That brought protests from some members of the panel, such as Damon Silvers, policy director for the AFL-CIO labor federation, who told Caldwell: "It is not a plausible position that there is no systemic risk here." The report says the position appears "premature."

"Treasury should explain why it sees no danger" and regulators should subject Wall Street banks to new stress tests to gauge their ability to deal with a potential crisis, the report states.

In legal moves by mortgage investors against banks, one action alone could seek to force Bank of America to buy back and take partial losses on as much as $47 billion in soured loans, the report notes.

The oversight panel was created by Congress to oversee the Treasury's $700 billion rescue program that came in at the peak of the financial crisis in the fall of 2008. Of the total, $75 billion was earmarked for mortgage assistance programs.